How do I vet an MCA funder before signing? Due diligence checklist

Full answer

MCA is a less-regulated segment than bank lending, which means the burden of vetting falls on you. A 30-minute due diligence pass before signing can save you from contracts with confession-of-judgment clauses, hidden fees, aggressive default playbooks, or outright fraud. Here's the 15-point checklist.

1. State business registration. Search the funder's legal entity name in the Secretary of State website of their headquarters state (Florida, New York, Delaware most common). The entity should be in 'active' or 'good standing' status. Inactive, dissolved, or 'forfeited' status is a hard stop.

2. BBB rating + accreditation. Look up the funder on bbb.org. Look for A or A+ rating, accredited status, and read the complaint detail. 1-3 complaints/year is normal for a real funder; 20+ complaints/year suggests systemic issues.

3. Online complaint patterns. Search '[funder name] complaints', '[funder name] lawsuit', '[funder name] reddit' and read 10-20 results. You're looking for patterns: aggressive collection tactics, contracts not honored, surprise fees, hard-to-reach support. Isolated complaints are normal; recurring themes are red flags.

4. Broker vs direct funder confirmation. Ask explicitly: 'Are you the direct funder or are you a broker placing this with someone else?' Brokers are not bad, but you need to know — broker layers add commission to the factor rate. Direct funders typically save 3-10% on effective cost vs broker-routed deals.

5. Confession of judgment (COJ) clause. Read your contract carefully. COJ clauses let the funder file a pre-signed judgment against you in court without notice or hearing if you default. New York banned COJ enforcement against out-of-state borrowers in 2019, but many contracts still include the language. If a COJ clause exists, either get it struck or walk away.

6. Reconciliation / true-up rights. The contract should clearly state your right to request a reduced holdback if revenue drops materially. Vague or absent reconciliation language is a red flag — it means the funder has no contractual obligation to work with you in a downturn.

7. Prepayment terms. Ask: 'If I pay off early, do I get any discount on the remaining factor amount?' Best-in-class funders offer prepayment discounts (e.g., 50% of unpaid factor if paid within 60 days). No-discount funders charge you the full factor regardless of payoff timing — that materially changes the realistic cost if you might pay off early.

8. Default fees + acceleration terms. Read the default section. What triggers default (typical: 1-2 missed payments, stacking, closing the merchant processing account)? What fees stack on (NSF fees, late fees, collection costs, attorney fees)? Some contracts add 30-50% to the outstanding balance in default fees within the first 30 days.

9. UCC filing pattern. Search the funder name in your state's UCC filing database (some are free, some charge $5-15). Funders that file UCC liens at funding are normal — that's standard practice. Funders that file UCC liens on assets unrelated to receivables (real estate, fixed assets) without disclosing it upfront are a red flag.

10. Lawsuit history (PACER / state court search). Search the funder name in PACER (federal court) and your state's court database. High litigation volume against merchants is a yellow flag (could just mean lots of deals, lots of defaults). Look at whether the funder is the plaintiff (suing merchants) or defendant (being sued by merchants). High defendant counts on consumer-protection or fraud claims are red flags.

11. Contract clarity + length. A reasonable MCA contract is 15-30 pages. 50+ pages with dense legal language and unusual definitions is often designed to bury problematic terms. If you can't understand the contract after 30 minutes of careful reading, have an attorney review or walk away.

12. Factor rate transparency. Does the funder provide a clear payback total, factor rate, term, and effective APR equivalent upfront? Or do they obscure the math with daily payment focus only? Good funders give you all numbers; bad ones hide the APR-equivalent.

13. Customer service responsiveness. Before signing, call the funder's main number with a simple question (e.g., 'what's your standard reconciliation timeline?'). If you get a human within 5 minutes, that's a good sign. If you get voicemail jail or unresponsive email for 24+ hours, expect that level of service during a hardship event.

14. Payoff statement availability. Ask: 'Can I request a payoff statement at any time, and how fast do I receive it?' Reasonable funders provide payoff statements within 1-3 business days on request. Funders that delay payoff statements (or charge fees for them) are signaling that they don't want you to pay off early.

15. Reference checks. Ask for 2-3 references of recent merchants who have completed deals. Real funders provide these; sketchy operations refuse. Call the references and ask: how was the funding process, did the contract match what was sold, how was customer service, would you take another deal with this funder.

Scoring: aim for 12+ green checks before signing. 9-11 is acceptable for low-risk smaller deals. Below 9 is a red flag — there are 100+ legitimate funders in this space, you don't need to settle. Walk-away triggers: confession of judgment that won't be struck, no reconciliation clause, factor rate not disclosed upfront, BBB rating below B, active lawsuit pattern as defendant on consumer-protection claims, or entity not in good standing.

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